At present, Boeing (BA) has a forward EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple of 11.2x, which is higher than its average multiple since February 2008 of 8.8x. The market is expecting Boeing’s EBITDA to rise 51% in 2017.
As shown in the chart above, Boeing has mostly traded above the industry median since 2008. Peers included in the industry median calculation were Lockheed Martin (LMT), United Technologies (UTX), General Dynamics (GD), Rockwell Collins (COL), and Raytheon (RTN). However, these are not strictly comparable.
What should investors track?
Rising airline travel demand bodes well for Boeing, as this would mean increasing capacity for the airline and more aircraft orders. However, the value of orders that Boeing is able to capture will depend on aircraft prices, which are getting extremely competitive. Recently, Lockheed Martin slashed the price of its F-35 aircraft, which now costs less than Boeing’s F-18. Boeing has had similar price wars with rivals Airbus and Bombardier.
A risk to Boeing’s current valuation would be a sudden downturn in the airline industry, which would result in Boeing’s orders drying up. A downturn could occur with global economic decline or a sudden rise in oil prices. A slowdown in China is a key risk to Boeing’s valuation, as the company earns 25% of its revenue from the country.
Boeing forms ~9.5% of the iShares US Aerospace & Defense ETF (ITA). ITA has a 9% exposure to United Technologies (UTX), a ~7.9% exposure to Lockheed Martin (LMT), a 6.5% exposure to General Dynamics (GD), and a 6.5% exposure to Raytheon (RTN).